Empire Petroleum Corporation — Q1 2024 Form 10-Q Summary
Business Context and Reporting Period
Empire Petroleum Corporation is an independent oil and gas company focused on optimizing developed production and developing reserves. The unaudited quarterly report covers the three months ended March 31, 2024, with comparison to the three months ended March 31, 2023. Operations include properties in New Mexico, North Dakota, Texas and Louisiana. The company completed four North Dakota Starbuck wells during the quarter.
Financial Performance and Position
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Total product revenue | $10.24 million | $10.10 million |
| Total revenue, including derivatives | $9.39 million | $10.05 million |
| Operating loss | $(4.40) million | $(2.22) million |
| Net loss | $(3.98) million | $(2.46) million |
| Loss per diluted share | $(0.15) | $(0.11) |
| Cash flow from operations | $3.91 million | $(5.07) million |
| Capital additions to oil and gas properties | $16.94 million cash; $13.36 million incurred | $2.21 million |
| Cash balance at period end | $3.49 million | $6.76 million |
Operating margin was approximately negative 46.9% of total revenue, compared with negative 22.1% in the prior-year quarter. Net margin was approximately negative 42.3%, compared with negative 24.5%. The filing does not present a company-defined adjusted EBITDA or free cash flow measure.
- Oil revenue increased 6% to $9.44 million as oil production rose 9% to 130,760 barrels, despite the average realized oil price declining to $72.21 per barrel from $74.33.
- Natural gas revenue declined 43% to $377,000, and NGL revenue declined 18% to $416,000, reflecting lower prices and volumes.
- Total production increased modestly to 200,848 Boe from 198,549 Boe. Average revenue per Boe was approximately $50.96 versus $50.87.
- Lease operating expense increased 13% to $7.39 million. DD&A and asset-retirement accretion nearly doubled to $1.98 million, primarily due to North Dakota drilling and higher capitalized costs.
- General and administrative expense declined 10% to $3.59 million, partly because Q1 2023 included $360,000 of former-CEO severance.
- Cash from operations was positive primarily because of working-capital changes, including a $4.34 million increase in accounts payable.
At March 31, 2024, total assets were $100.08 million, total liabilities were $68.39 million, and stockholders’ equity was $31.69 million. Working capital was negative $13.22 million, compared with negative $6.30 million at December 31, 2023.
Debt, Liquidity and Capital Resources
- Total debt was $13.05 million at March 31, 2024, compared with $5.70 million at December 31, 2023. This included $8.44 million drawn under the Equity Bank credit facility, $5.00 million advanced under a related-party promissory note, and approximately $1.06 million owed under an existing related-party note, offset by debt classifications and repayments.
- The Equity Bank facility has a stated initial commitment of $10 million, a maximum commitment of $15 million, interest at prime plus 1.50% subject to an 8.50% floor, and maturity on December 29, 2026. Management reported approximately $1.1 million of availability at March 31.
- The company was technically out of compliance with the credit facility’s 1.0-to-1.0 current-ratio covenant at quarter-end. The breach was cured within the applicable period after the April 2024 subscription rights offering.
- The related-party promissory note matures February 15, 2026, bears interest at 7%, and is convertible at the holder’s option at $6.25 per share. The embedded conversion feature was recorded as a $1.29 million Level 3 derivative liability.
- Cash declined by $4.30 million during the quarter because operating cash and $8.89 million of financing cash were more than offset by $17.10 million of investing outflows.
- In April 2024, the company completed a subscription rights offering that generated approximately $20.66 million of gross proceeds. The March 31 balance sheet does not reflect those proceeds.
Material Changes, Outlook and Risks
- The company continued a significant North Dakota drilling program, with approximately $25 million of cumulative Starbuck field costs and $13.4 million of Q1 capital expenditures incurred.
- Derivative losses increased to $858,000 from $67,000, including approximately $847,000 of unrealized losses. Outstanding WTI swaps covered 30 MBbls in each of Q2, Q3 and Q4 2024 at weighted-average fixed prices of $72.15, $77.02 and $75.57 per barrel, respectively.
- Other income included a $738,000 gain from remeasurement of the related-party note’s embedded derivative; this was a non-operating and valuation-based item.
- Management expects to fund drilling, operations, contractual obligations and potential acquisitions through debt or equity issuances, cash on hand and operating cash flow. No specific production, revenue, earnings or capital-spending guidance was provided.
- Management states that the company has incurred operating losses in 2023 and 2024 and that there is no assurance it will become profitable or obtain sufficient funds to finance future operations.
- Asset-retirement obligations totaled $28.81 million, including a $700,000 current portion. These obligations relate to future plugging, abandonment and environmental remediation.
- Under an agreement with the New Mexico Oil Conservation Division, the company deposited $1.0 million into escrow for inactive-well compliance work. After $550,000 was returned, $450,000 remained at March 31; management expects an additional $250,000 return in Q2 after completing work on 25 wells.
- Energy Evolution and related parties provided the $5.0 million promissory note and hold significant ownership and governance interests. Related-party balances also included approximately $1.03 million of receivables and $213,000 of revenue payable.
- The CFO resigned effective March 28, 2024. On May 10, 2024, the CEO was appointed interim principal financial officer while the company searches for a successor. Management reported effective disclosure controls at March 31 and plans additional control enhancements during 2024.
Most Important Facts to Verify
- Whether the April rights offering proceeds and subsequent share issuance provide adequate liquidity for the North Dakota drilling program and resolve ongoing working-capital pressure.
- Current borrowing-base availability, covenant compliance and repayment requirements under the Equity Bank facility.
- Actual production, well performance and capital efficiency from the Starbuck drilling program.
- Exposure to lower oil, natural gas and NGL prices, including the economic impact of Q2–Q4 2024 hedges.
- Terms, potential share dilution and valuation assumptions associated with the $5 million convertible related-party note.
- Progress on New Mexico inactive-well compliance work and the company’s approximately $28.8 million asset-retirement obligation.
- Management’s ability to maintain financial reporting controls during the CFO transition and planned control enhancements.